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Social Insurance, Incentives, and Risk Taking

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  • Hans-Werner Sinn

Abstract

From the perspective of parents, redistributive taxation can be seen as social insurance for their children, for which no private alternative exists. Because private insurance comes too late during a person's life, it cannot cover the same risks as social insurance. Empirically, 85% of social insurance covers risks for which no private insurance would have been available. Redistributive taxation can be efficiency enhancing, because it creates safety and because it stimulates income generating risk taking. However, it also brings about detrimental moral hazard effects. Both the enhancement of risk taking and the moral hazard effects tend to increase the inequality in the economy, and, under constant returns to risk taking, this increase is likely to be strong enough even to make the net-of-tax income distribution more unequal. Optimal redistributive taxation will either imply that the pie becomes bigger when there is less inequality in pre-tax incomes or that more redistribution creates more post-tax inequality. The welfare state will encounter severe risks when free migration of people, goods, and factors of production becomes possible. Basing redistributive taxation on a nationality principle may help overcome some of these risks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5335.

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Date of creation: Nov 1995
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Publication status: published as International Tax and Public Finance 3, (1996), pp. 259-280.
Handle: RePEc:nbr:nberwo:5335

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  1. Barr, Nicholas, 1992. "Economic Theory and the Welfare State: A Survey and Interpretation," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 741-803, June.
  2. Konrad, K.A., 1991. "Risk Taking And Taxation In Complete Capital Markets," Papers 90-91-20, California Irvine - School of Social Sciences.
  3. Persson, T. & Tabellini, G., 1993. "Is Inequality Harmful for Growth," Papers 537, Stockholm - International Economic Studies.
  4. John C. Harsanyi, 1953. "Cardinal Utility in Welfare Economics and in the Theory of Risk-taking," Journal of Political Economy, University of Chicago Press, vol. 61, pages 434.
  5. Ahsan, Syed M., 1976. "Taxation in a two-period temporal model of consumption and portfolio allocation," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 337-352.
  6. Kanbur, S M, 1979. "Of Risk Taking and the Personal Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 769-97, August.
  7. Sinn, Hans-Werner, 1986. "Risiko als Produktionsfaktor," Munich Reprints in Economics 19879, University of Munich, Department of Economics.
  8. Alberto Alesina & Dani Rodrik, 1991. "Distributive Politics and Economic Growth," NBER Working Papers 3668, National Bureau of Economic Research, Inc.
  9. Mirrlees, J. A., 1995. "Private risk and public action: The economics of the welfare state," European Economic Review, Elsevier, vol. 39(3-4), pages 383-397, April.
  10. Bulow, Jeremy I & Summers, Lawrence H, 1984. "The Taxation of Risky Assets," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 20-39, February.
  11. Gordon, Roger H, 1985. "Taxation of Corporate Capital Income: Tax Revenues versus Tax Distortions," The Quarterly Journal of Economics, MIT Press, vol. 100(1), pages 1-27, February.
  12. Kaplow, Louis, 1992. "Income Tax Deductions for Losses as Insurance," American Economic Review, American Economic Association, vol. 82(4), pages 1013-17, September.
  13. Sinn, Hans-Werner, 1995. "A Theory of the Welfare State," CEPR Discussion Papers 1278, C.E.P.R. Discussion Papers.
  14. Boadway, Robin W & Wildasin, David E, 1990. "Optimal Tax-Subsidy Policies for Industrial Adjustment to Uncertain Shocks," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 105-34, January.
  15. Christiansen, V., 1990. "Subsidization Of Risky Investment Under Income Taxation And Moral Hazard," The Warwick Economics Research Paper Series (TWERPS) 357, University of Warwick, Department of Economics.
  16. Varian, Hal R., 1980. "Redistributive taxation as social insurance," Journal of Public Economics, Elsevier, vol. 14(1), pages 49-68, August.
  17. Shavell, Steven, 1979. "On Moral Hazard and Insurance," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 541-62, November.
  18. Louis Kaplow, 1991. "A Note on Taxation as Social Insurance for Uncertain Labor Income," NBER Working Papers 3708, National Bureau of Economic Research, Inc.
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  1. Allemaal dankzij de verzekering
    by Thijs in eco.nomie.nl on 2008-07-04 09:23:03
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